Kerrisdale: Qualcomm Ruling Could Cut 'Stock Price In Half'

QUALCOMM, Inc. QCOM stock has more legal risk than the market is pricing in. In a new report out Wednesday, Kerrisdale Capital said Qualcomm is likely on the brink of losing its legal battle with the FTC, a decision which could have a major impact on Qualcomm’s bottom line.

High Government Win Rate

Kerrisdale said Judge Lucy Koh has already ruled against Qualcomm’s appeal to dismiss the case and ruled that the company is obligated to license its “standard essential” key patents to competitors such as Intel Corp. INTC on FRAND terms. Koh has also overruled Qualcomm’s objections to an ongoing class action lawsuit against the company alleging anticompetitive practices.

“None of this guarantees that Qualcomm will lose to the FTC, but we and other trial watchers have been impressed by the FTC’s performance and, by contrast, surprised at the sometimes combative interactions between Judge Koh and Qualcomm’s legal team,” Kerrisdale wrote. “In general, government plaintiffs like the FTC enjoy a high win rate, and in this specific case the probability of government victory appears even higher than usual.”

Kerrisdale is led by activist investor Sahm Adrangi, who Reuters noted "cemented his reputation with successful bets against Chinese internet companies."

Potential Impact

Kerrisdale said the stakes are far more threatening to Qualcomm’s long-term business outlook than a potential fine.

“If the judge grants the FTC the remedies it seeks, forcing Qualcomm, among other things, to license core patents to competitors and to renegotiate all of its existing licenses on fair terms, it could realistically cut Qualcomm’s licensing revenue, earnings power, and stock price in half,” Kerrisdale said.

The ruling would potentially remove Qualcomm’s rights to demand additional licensing fees from Apple, Inc. AAPL, Samsung Electronics or other device makers that buy chips from Intel that utilize Qualcomm’s patents.

“Thus Qualcomm will be compelled to drastically reduce what Apple has called its ‘extortion-level royalties’ – plausibly by an order of magnitude,” Kerrisdale said.

Major Headwinds

The ruling in FTC v. Qualcomm could come as soon as February, and a loss could result in renegotiation of Qualcomm licensing terms that could ultimately reduce the company’s annual revenue by $2.7 billion, Kerrisdale said.

An adjusted EPS in that scenario of $1.64 would imply a price target of around $21, the firm estimated. In addition, even in the seemingly unlikely event of a best-case scenario outcome from the FTC case, Kerrisdale said Qualcomm’s broader business will continue to face headwinds from an increasingly saturated global smartphone market.

Qualcomm stock traded lower by 4.6 percent to $51.77 following the bearish commentary. At time of publication, Qualcomm had not responded to a request for comment.

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Photo credit: Kārlis Dambrāns, Flickr